Canada: Why You Should Put Everything In Writing – No Entitlement To Labour And Material Payment Bond Claim In Absence Of Written Subcontract

In the construction industry, it is not uncommon for an owner to require a general contractor to obtain a labour and material payment bond, a guarantee that the contractor named in the bond will pay for all the labour and materials supplied for the bonded project. Any party who has a direct contract with a bonded contractor to supply goods or services in relation to the bonded project is entitled to make a claim under the bond.

In Wolverine Construction Inc. v. Trisura Guarantee Insurance Company, 2023 BCSC 405, the BC Supreme Court considered whether the plaintiff was a subcontractor in a project for which the defendant, Trisura Guarantee Insurance Company (“Trisura”), issued a labour and materials payment bond (“L&M Bond”). A finding in the affirmative would qualify the plaintiff as a claimant to the L&M Bond.

In this case, Frontline Civil Holdings Ltd. (“Frontline”) was the head contractor for a landfill-related construction project on land owned by the Peace River Regional District (“PRRD”) (the “Project”). Trisura issued the L&M Bond in relation to the Project, naming Frontline as the “principal”. The L&M Bond made Trisura and Frontline jointly and severally liable for payments to “claimants” up to the maximum amount of the L&M Bond. The L&M Bond defined a “claimant” as “one having a direct contract with the Principal for labour, material or both, used for reasonably required for use in the performance of the Contract.”

Sometime after the Project began, Frontline encountered financial difficulties, as a result of which Frontline entered into discussions with the plaintiff, Wolverine Construction Inc. (“Wolverine”), for assistance. It was not disputed that Wolverine, pursuant to their discussions with Frontline, undertook substantial work and paid various expenses associated with the Project. It was also not disputed that both parties worked towards having the head contract between PRRD and Frontline assigned to Wolverine.

Frontline was eventually assigned into bankruptcy. PRRD then issued a notice of default to Frontline and requested all work on the Project to be ceased. Approximately three months later, Wolverine notified Trisura and PRRD that Frontline had failed to pay the costs of labour and materials that it supplied to the Project, worth approximately $475,000, and claimed this amount, plus interest, against the L&M Bond.

Trisura denied Wolverine's claim on the basis that Wolverine had not provided any evidence that it had a subcontract with Frontline for the Project, and therefore, Wolverine was not a “claimant” within the meaning of the Bond. Trisura's position was that Wolverine likely provided labour, material, and financing, not pursuant to a subcontract with Frontline, but because it intended to take over the Project from Frontline by way of an assignment of the head contract.

In response, Wolverine commenced an action against Trisura, alleging there was a subcontract agreement between Frontline and Wolverine. This issue was heard on a summary basis by Justice Giaschi.

After reviewing affidavit and discovery evidence of the Chief Operating Officer of Wolverine (the “COO”), Justice Giaschi concluded that the evidence fell far short of establishing the existence of a subcontract agreement between Wolverine and Frontline, or the essential terms of that subcontract.

Justice Giaschi noted that the COO had very little to no first-hand knowledge of the discussions between Wolverine and Frontline pertaining to the alleged subcontract. Although the COO stated that he understood from the company's corporate records that a draft copy of a subcontract between Wolverine and Frontline was signed, he did not identify any of the individuals involved, the terms of the alleged agreement, or which corporate records he reviewed to reach this conclusion. Further, the draft subcontract was an incomplete standard form of contract that contained no particulars.

The COO's evidence explaining why he could not attach the alleged subcontract as an exhibit was that it “may” have been lost due to a server failure. Justice Giaschi found the COO's evidence to be vague and insufficient to clarify whether the alleged subcontract was in fact lost or whether it simply had not existed.

Justice Giaschi noted that, at his examination for discovery, the COO gave evidence that he did not know whether the subcontract was finalized or whether a written subcontract was ever drafted.

Finally, the COO did not provide any evidence about the prices agreed to between Wolverine and Frontline, the amounts allegedly owing from Frontline to Wolverine, or evidence that Wolverine sent any invoices to Frontline for work done pursuant to the alleged subcontract. Justice Giaschi concluded these were fatal to the plaintiff's request that Trisura pay the sums allegedly owing to Wolverine because Wolverine could not prove what, if any, amounts were due and owing by Frontline in the absence of this information.

Justice Giaschi further concluded that he could not infer the existence of a subcontract from the mere fact that Wolverine did work on the Project and incurred costs and expenses in relation to the Project. Rather, the evidence suggested that Wolverine took over the Project with the intent of having the head contract assigned to it, rather than as a subcontractor to Frontline.

Based on the evidence adduced at the summary trial, Justice Giaschi concluded that Wolverine had not discharged its onus of proving on a balance of probabilities that there was a subcontract with Frontline for the supply of labour and materials or the amounts owing to Wolverine by Frontline. Therefore, Justice Giaschi found that Wolverine was not a “claimant” within the meaning of the L&M Bond, and dismissed Wolverine's action against Trisura.

Key takeaway: Always put everything in writing. When a disagreement arises and you do not have a written contract in place, your contractual rights and interests may not be protected unless you are able to satisfy the court that the contract in fact existed and what the essential terms of the contract were.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.